India’s IT giants brace for Q2 stagnation as AI deflation looms

The projection suggests continued softness in demand, following a period of modest growth in the previous quarter.

This slowdown may reflect broader industry pressures. The advisory notes “AI deflation” as a factor, where clients could be reallocating budgets from legacy outsourcing contracts to AI-driven automation. The shift aligns with moves like Gupshup’s recent pivot, where the enterprise messaging platform is prioritizing AI as a growth driver without launching a standalone product. Such strategies could indicate a broader trend among incumbents seeking to integrate AI into existing offerings rather than overhauling their business models.

The timing coincides with a surge in investor interest in AI startups. Earlier this month, StartupReader reported a shift toward later-stage AI startups in India, citing stronger revenue growth and global demand. Meanwhile, Seattle-based Nuance Labs raised $50 million to develop a full-duplex conversational model, highlighting how rapidly AI infrastructure is evolving beyond traditional IT hubs.

The contrast raises questions about the path forward for India’s IT majors. While companies like Anthropic, Gamma, and Clay discussed AI deployment challenges at TechCrunch Disrupt 2026—focusing on the gap between demo and daily use—incumbents may face hurdles in adapting their legacy operations. The challenge could extend beyond technology, potentially reshaping long-standing business models built on labor arbitrage. How these firms navigate the transition may determine whether they retain relevance in an AI-driven landscape.

For founders and operators, the takeaway is the urgency of exploring AI integration, even if incrementally. The UnearthInsight report also highlights steady margins—for now—but margins in IT services have often been a lagging indicator of industry shifts. The real test may lie in whether these firms can demonstrate meaningful progress in AI adoption before startups carve out larger portions of their market.

Investors should monitor deal activity beyond cost-cutting measures. If the top firms struggle to show traction in AI-driven initiatives, the narrative of stagnation could solidify. That would leave them competing not just with each other, but with a new wave of AI-native companies unburdened by legacy constraints. The next earnings cycle may reveal whether this slowdown is temporary—or the beginning of a longer-term recalibration.

Sources: yourstory.com